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Wisconsin Energy Corporation Annual Valuation – 2015 $WEC

WEC_LogoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – March 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a specific look at how Wisconsin Energy Corporation (WEC) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Wisconsin Energy Corporation is a holding company. The Company conducts its operations in two reportable segments: a utility energy segment and a non-utility energy segment. Its primary subsidiaries are Wisconsin Electric Power Company, Wisconsin Gas LLC and W.E. Power, LLC. The Company’s utility energy segment consists of Wisconsin Electric and Wisconsin Gas, operating together under the trade name of We Energies. We Energies serve approximately 1,128,300 electric customers in Wisconsin and the Upper Peninsula of Michigan and approximately 1,079,800 gas customers in Wisconsin and approximately 445 steam customers in metropolitan Milwaukee, Wisconsin. Its non-utility energy segment consists of We Power, owns and leases to Wisconsin Electric generation plants constructed as part of its Power the Future (PTF) strategy.

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 4/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary

Key Data:

Recent Price $49.05
MG Value $54.60
MG Opinion Fairly Valued
Value Based on 3% Growth $35.24
Value Based on 0% Growth $20.66
Market Implied Growth Rate 5.84%
Net Current Asset Value (NCAV) -$40.53
PEmg 20.19
Current Ratio 0.92
PB Ratio 2.52

Balance Sheet – December 2014

Current Assets $1,535,000,000
Current Liabilities $1,669,000,000
Total Debt $4,186,000,000
Total Assets $15,163,000,000
Intangible Assets $442,000,000
Total Liabilities $10,744,000,000
Outstanding Shares 227,200,000

Earnings Per Share

2014 $2.59
2013 $2.51
2012 $2.35
2011 $2.24
2010 $1.93
2009 $1.62
2008 $1.52
2007 $1.42
2006 $1.34
2005 $1.31
2004 $0.52

Earnings Per Share – ModernGraham

2014 $2.43
2013 $2.28
2012 $2.08
2011 $1.88
2010 $1.66
2009 $1.50

Dividend History

Conclusion:

Wisconsin Energy Corporation is not suitable for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned by the low current ratio, and the high PEmg and PB ratios, while the Enterprising Investor is concerned with the level of debt relative to the current assets.  As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities at this time.  From a valuation side of things, the company appears to be fairly valued after growing its EPSmg (normalized earnings) from $1.66 in 2010 to $2.43 for 2014.  This level of demonstrated growth supports the market’s implied estimate of 5.84% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value within a margin of safety relative to the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Wisconsin Energy Corporation (WEC)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Wisconsin Energy Corporation (WEC) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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